Posted at 3:24 PM (CST) by & filed under Jim's Mailbox.

Dear CIGAs,

The following is courtesy of CIGA Marc D

nationaldebt05

 

Jim,

The author is at least one of the "young geeks" you so often refer to who figured out himself that he was a fraud!

“Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.”

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CIGA Tim

Posted at 1:36 PM (CST) by & filed under General Editorial.

Dear CIGAs,

Quantitive Easing – the direction the Fed is taking, saying they no longer are interested in buying toxic OTC derivatives with little or no value.

This change may well be a result of Bloomberg’s suit to force the Fed to reveal what these assets are on their balance sheet. This forced change to Quantitive Easing is the strongest tool for blasting trillions into economies.

If you know anything about, monetary science, gold is down on one of the greatest positive gold factors.

In the Japanese experience banks and other institutions did not renew lending significant enough for any positive effect. Many simply took the funds to rebuild their shattered balance sheets.

Quantitive Easing does not provide a basis for dollar strength, no matter what the algorithms say.

Not only was it an internal failure but it took the Yen down about 20%.

The talking heads are now saying that the dollar is the measure of how bad the economy will become. That is foolish in today’s situation

Jim Sinclair’s Commentary

As the balance sheet of the Fed turns toxic on the asset side, the US dollar as the common share of this balance sheet must go down

The Federal Reserve’s balance sheet
October 25, 2008

On Thursday, the Federal Reserve issued its weekly H.4.1 report, which provides details of the Fed’s balance sheet. Once upon a time, this was one of the least interesting of the government’s many releases of data. These days, it’s become one of the most exciting.

The essence of the Fed’s balance sheet used to be quite simple. The Fed’s primary operations would consist of either buying outstanding Treasury securities or issuing loans to banks through its discount window. It paid for these transactions by creating credits in accounts that banks hold with the Federal Reserve, known as reserve deposits. Banks can turn those reserves into green cash any time they desire, so the process is sometimes loosely summarized as saying that the Fed pays for the Treasury bills it buys or loans it extends by "printing money". Before the excitement began, the Fed’s assets consisted primarily of the Treasury securities it had acquired over time (about $800 billion as of August 2007) plus its discount loans (an insignificant number at that time). Its liabilities consisted primarily of cash held by the public (about $800 billion a year ago) plus the reserve deposits held by banks (which again used to be a very small number).

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The Carry Trade
The Return of the Geeks
Jun 07, 2006

I have been thinking about the nightmare carry trade scenario. In other words, what is the worst possible situation for carry trade players?

For those unfamiliar with the term ‘carry trade,’ I will use the definition found on Freebuck.com.

“Carry trade – The speculation strategy that borrows an asset at one interest rate, sells the asset, then invests those funds into a different asset that generates a higher interest rate yield. Profit is acquired by the difference between the cost of the borrowed asset and the yield on the purchased asset.”

The nightmare carry trade scenario: the six conditions

I view the nightmare scenario something like the following:

1. End of quantitative easing (QE) in Japan
2. End of ZIRP in Japan (Rising interest rates)
3. Rising interest rates in Europe
4. Falling interest rates in the U.S.
5. Tightening credit in the U.S.
6. A rising yen vs. the U.S. dollar

The nightmare carry trade scenario: quantitative easing has ended

Quantitative easing has already ended in Japan. Quantitative easing simply means excessive printing of money by the Bank of Japan in order to defeat the deflation that has been raging for about 18 years.

I believe that ZIRP (zero interest rate policy) and QE (quantitative easing) prolonged Japan’s deflation, but for now, that is irrelevant. The key point is that both are about to come to an end. Proof of the

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Jim Sinclair’s Commentary
Quantitive Easing at an unprecedented rate (certainly to take place) combined with 1% interest rates in the US is a road to Weimar. The dollar and the Fed are at the helm.

Therefore:
If you know anything about monetary science, gold is down on the greatest positive factor for gold.

Posted at 10:12 PM (CST) by & filed under Uncategorized.

Dear Friends,

Welcome to the make believe world of what is left of the young lions. These people are clearly the top of the mega-speculative feeding chain and are now trying to eat each other.

Gold is the inverse of the dollar. Dollar strength is a product of short-term demand and short covering. This short covering emanates from enormous unstable risk carry trades and OTC derivatives written thereupon being buffeted by changing interest and cross rates, even if the changes are only window dressing.

What that means is large supply and demand emanating from our dear friends who are the same people who have basically killed the international financial systems. They are back again causing the US dollar to run contrary to the interests of fighting deflation as you will read below.

This dollar strength is not fundamental nor will it last one day longer than it takes the young lions to close or square their positions.

Welcome to the make believe world of what is left of the young lions. They are now trying to eat each other.

Jim Sinclair’s Commentary

To understand what is happening that so far has confused if not demoralized you, it is time to read the following. The key points are underlined.

Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn’t Happen Here
“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.”

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

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Jim Sinclair’s Commentary

Judging from historical review, employing Quantitative Easing as a tool to fight deflation over a significant period of time will serve to depress the value of the currency in the long term.

Bernanke May Seek New Tactics as Fed Rate Nears 1%
By CB Online Staff
(Excerpts from article)

`Quantitative Easing’

The Bank of Japan, struggling against deflation, slow growth and consumers’ reluctance to spend, brought its policy rate close to zero before turning in 2001 to a so-called quantitative easing strategy of increasing money in accounts held for commercial banks. The policy lasted for five years, before the central bank began to draw down reserves and raised its benchmark rate to 0.5 percent, where it has been since February 2007.

The Fed has flooded the economy with so much cash that excess reserve balances at banks, or cash surpluses beyond what banks are required to hold against deposits, soared to $136 billion for the two-week period ending Oct. 8 compared with an average of $1.4 billion in the same month last year.

“The Federal Reserve has already entered a regime of quantitative easing,” said Brian Sack, vice president at Macroeconomic Advisers LLC who also worked with Bernanke as an economist in the Monetary Affairs Division.

As their liquidity programs dump excess funds into the banking system, it’s become more difficult for the Fed to keep the rate at which banks lend overnight to each other in line with policy makers’ 1.5 percent target

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Jim Sinclair’s Commentary

As violent moves take place both in rates (Lie-bor) and de-leveraged assets, currency value in today’s world reflects the short term currency demand and supply having nothing whatsoever to do with underlying fundamentals.

Dollar fundamentals are dire. Combine the facts that the largest denomination of reserves held by central banks previously having indicated a desire to diversify, and that dollar based institutions hold more OTC toxic derivatives than others, the dollar long term direction is DOWN.

What is taking place now is the crazy speculators in complex trades creating un-real prices in terms of trend, screwing up the world one more time.

Currency Carry Trade

What does it mean?
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage the investor chooses to use.

Investopedia Says…
Here’s an example of a "yen carry trade": a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let’s assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% – 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar was to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

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Jim Sinclair’s Commentary

The supposed upcoming new Bretton Woods Agreement is more concerned with:

1. Unregulated hedge funds now screwing up the exchange markets making Bernanke’s fight against deflation ineffectual.
2. The implementation of Quantitative Monetary Easing.
3. The implementation of Fiscal Stimulus on a Global basis.

There is no chance of any new monetary order when the old one is presently acting like a Category 4 twister.

Yen Near Highest This Week as Stock Decline Crimps Carry Trades
By Ron Harui and Stanley White
(Excerpt from article)

Leaders of the Group of 20 industrial and emerging nations, due to gather Nov. 14-15 in Washington, will consider steps ranging from raising bank-capital standards to regulating hedge funds to address the financial crisis. Member nations’ finance ministers called for interest-rate cuts and increased government spending after meeting this week in Sao Paulo.

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Conclusion:

Since gold is the inverse of the US dollar and the dollar strength is purely from enormous money flows seeking to readjust their positions, it is quite short term. It could end as early as one minute from now.

When it does end, the dollar dives and gold roars.

Gold will trade at $1200 and at $1650.

Respectfully,
Jim

Posted at 10:03 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

THE ECONOMY WILL NOT BOTTOM FOR MANY MONTHS, PERHAPS A COUPLE OF YEARS.
HOWEVER, THE STOCK, COMMODITY, AND CURRENCY MARKETS ARE DIFFERENT FROM THE ECONOMY.

The stock market discounts future economic events.  Right now it is discounting economic decline that will not take place for months.  Financial stocks have been declining for over 16months, and the U.S. market as a whole for 13months. Yet, if you believe the Government’s economic statistics, the economy was growing through June.

Many stocks could fall further over the next several months or years in our opinion.  Financial stocks will be among them.  However, some stocks are so cheap that they deserve to be bought, even though we expect further global macro economic problems.  In such an environment, many assets become priced too cheaply, and the wise who have husbanded their liquidity, will have the capital to buy greatly undervalued assets, like the clerk in the following story.

During the great depression of the 1930s, there was a humble clerk on the New York Stock Exchange, who had assiduously saved his money.  This man saw Singer Sewing Machine, one of the great tech stocks of the day, fall to $1 per share.  He put  his savings in the stock.  In the following years, the stock rose many fold, and he became a very rich man. 

This story combines two important attributes of the successful investor.  First, he was a saver and thus had capital when the time was right to buy.  Second, he knew value and bought when others could only think of selling.

Even if we are in for another Great Depression (and we don’t currently think that we are), in our opinion there will be many stock market rallies, and some of them will be big.

Even in the Great Depression, in some years stocks were down substantially and in others they were up..  As we have pointed out before, the Great Depression had no less than 3 huge rallies, rallying 50%, 130%, and 90%.  It also had many 10-15% rallies.

THE CURRENT GLOBAL ECONOMIC SLOWDOWN

The current economic slowdown is the result of unwise speculation in many things, but especially real estate.  The problem was created  by: 15 continuous years of unwise political and legislative decisions, unwise personal behavior of many individuals, unwise salesmanship from the real estate industry and Wall Street in the U.S. and from many banking institutions and investors in other countries, and a lack of discipline and due diligence on the part of many of the participants.

IN THE U.S.

The bad actors in the real estate profession will gradually be purged, and many may see the inside of a jail cell.  The unwise real estate purchasers are experiencing foreclosure.  Unfortunately, the second class intellects in Congress, who created and fostered much of the problem, and some of the Wall Street problem creators are still in charge of the Ship of State.  This is not a pretty picture. Let us hope that President-Elect Obama has the wisdom to avoid elevating any destructive political figures and  Wall Street problem creators to positions of power.

I believe that it was former Vice President Hubert Humphrey who once said, "To err is human. To blame it on someone else is politics."  Clearly, we have seen a masterful display of this skill in the current national economic debate.

Negativity and pessimism abound in the media and in public conversation about the markets.  While all of the negativity has been festering, to us it looks like Chinese, Brazilian, Indian, and other stock markets, along with some currencies, some growth stocks, oil stocks, gold stocks, and food stocks halted their declines and some have actually began to appreciate from their lows.

We expect we will get periods of weakness, and possibly re-test the lows. In our opinion, however, smart investors  may want to place some low priced bids for stocks that get thrown away. This has been the  standard behavior of many successful investors for centuries.

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Posted at 9:59 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

If the nature of these assets was made public, the weakness now in the Federal Reserve Balance Sheet would be immediately obvious. The dollar would implode immediately and treasury instruments would have to be downgraded. It also would reveal those entities who are the near and dear of the Fed.

Fed Defies Transparency Aim in Refusal to Disclose
By Mark Pittman, Bob Ivry and Alison Fitzgerald

Nov. 10 (Bloomberg) — The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

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Jim Sinclair’s Commentary

Before all this is over you will see continuing and major bullion purchases by central banks. To hell with standing agreements.

ECB-Gold reserves rise by 1 mln euros in week
Tue, Nov 11 2008, 14:27 GMT

FRANKFURT, Nov 11 (Reuters) – Gold and gold receivables held by euro zone central banks rose by 1 million euros to 220.193 billion euros in the week ending Nov. 7, the European Central Bank said on Tuesday.

Net foreign exchange reserves in the Eurosystem of central banks rose by 22.8 billion euros to 361.1 billion euros, the ECB said in its regular weekly consolidated financial statement.

Gold holdings rose mainly as a result of purchases by 1 euro zone central banks, and this was consistent with the 2004 Central Bank Gold Agreement, the ECB said.

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Posted at 1:37 PM (CST) by & filed under Jim's Mailbox.

Jim,

"Colin Powell has made bizarre comments that echo the recent declaration by Democratic VP candidate Joe Biden that there will be an “international crisis” early into Barack Obama’s presidency that will test the new president by forcing him to make unpopular decisions.

Speaking on meet the press two days ago, Powell officially endorsed Obama and also made the following statement:

“The problems will always be there and there’s going to be a crisis which will come along on the 21st, 22nd of January that we don’t even know about right now.”"

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I have heard the stories about riot troops being brought into the U.S. , not for release but for active duty here.

I suppose they could’ve been speaking hypothetically, especially with regard to the specific dates given. But thinking further about it, we may conclude that whatever unpopular actions Obama has to take, it would be more politically "correct" to do them quickly, especially because if it is early enough he would be able to justify these drastic actions by trying to correct the catastrophic financial and economical situation the Bush administration has created.

Regards,
Christopher

Jim,

I guess prosecution is out of the question. Perhaps a citizens should attend to the needful. If this, along with everything else, is not guilt beyond reasonable doubt, I don’t know what is.

CIGA Pedro

A Quiet Windfall for US Banks
Monday 10 November 2008
by: Amit R. Paley, The Washington Post

"With attention on bailout debate, Treasury made change to tax policy.

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration’s request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion…

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "

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